PhotoA credit card can be a powerful, helpful financial tool. It can also plunge you so deep into debt that it will take years to get out. It all depends on how you use it.

Bruce McClary, a vice-president at the National Federation for Credit Counseling, says it's important for consumers to think about how they are going to use a credit card when they apply for it.

“Make sure that you're doing it for all the right reasons,” McClary told ConsumerAffairs. “Just opening a credit card to have it is not good enough. You should have a long-term goal that might be supported by the proper use of credit.”

Good uses of a credit card

Having a credit card in which you tap only a small portion of your available credit and make the payments on time will boost your credit score. That's a proper use of a credit card.

Here's another: you need to make a major purchase or to cover an unexpected expense. If you can put it on your credit card and make regular, significant payments each month, it can help you stay on your budget. In such a case, however, you would need to be careful not to run up additional charges until you have reduced the balance to a manageable level.

One last way you should use credit card is to pay for gasoline and groceries. The card provides a convenient form of payment for making the purchases, but paying off the bill in full right away can also boost your credit score. However, if you're using the card instead of the cash in your bank account, then just make sure you aren't spending your cash on other things, since it will need to be available to pay off the credit card bill.

Manage your debt

Diane Moogalian, Vice President, Customer Operations at Equifax, says the way you use a credit card should fit into your monthly cash flow. She says it is more important to effectively manage your debt than to pay off the balance in full each month.

“Once again, everyone’s situation is different, but generally speaking, there are three instances where you may want to reconsider paying a credit card balance in full,” she said in an interview. “You’re having trouble making ends meet and are suffering from a cash flow problem; you’re anticipating several major expenses coming up; or you have a credit card with a low APR.”

Moogalian says a key element of being financially literate involves understanding how different aspects of credit impact your overall financial situation. For example, if you plan to pay off your credit card balance over 12 months instead of six months, that leaves more money for savings. Having adequate savings may prevent you from having to run up your credit card bill in the event of an unexpected expense.

How it can hurt

The problem, of course, is that credit card use can quickly get out of control. Not only can balances soar, but consumers who make late or only partial payments can end up falling behind. Heather Battison, a vice president at TransUnion, says that appears to be the number one trap for consumers.

“If a credit bill is left unpaid, it can show up on a credit report and indicate to lenders the consumer is a risky borrower who may be unable to pay off debt,” Battison said. "It’s also important to understand that if a payment is late, the delinquency can appear on a credit report for up to seven years.”

The bottom line is this: a credit card should serve a specific purpose. It makes everyday purchases more convenient or it provides short term financing for a major purchase. When it is used because you lack the money to pay for things, that's when it leads to trouble.

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